Developments in the Luxembourg Financial Sector

October 01, 2015

The Luxembourg government has brought to Parliament a bill of law transposing UCITS V into Luxembourg’s UCI Law and AIFM Law. Further, the Luxembourg CSSF published a new version of its AIFMD Frequently Asked Questions, among other matters clarifying the definitions of “marketing” and “reverse solicitation” from a Luxembourg perspective. In another development, the Luxembourg “FATCA Law” recently came into effect, with an impact on covered institutions pursuant to the provisions of the law itself as well as the relevant guidance. These developments are discussed below. 

Introduction of Bill to Transpose UCITS V into Luxembourg Law 

By Patrick Goebel and Christopher Dortschy 

The Luxembourg government brought to Parliament, on 5 August 2015, bill of law number 6845 (Bill) – transposing UCITS V1 into Luxembourg law. The Bill will introduce the new provisions required under UCITS V into the law of 17 December 2010 on undertakings for collective investment (UCI Law), as well as amendments to the law of 12 July 2013 on alternative investment fund managers (AIFM Law). 

UCITS V – Recap and Next Steps 

UCITS V harmonizes eligibility rules for depositaries of UCITS, strengthens the liability regime of depositaries across the EU and sets common rules on segregation and safeguarding of assets under custody. In addition, UCITS V requires the implementation of remuneration policies for those persons managing UCITS or having an impact on the UCITS’ risk profile, in order to promote sound and effective risk management and to avoid excessive risk-taking. Further, UCITS V harmonizes administrative sanctions that may be undertaken by national supervisory authorities. 

UCITS V was published in the Official Journal on 28 August 2014 and came into force on 17 September 2014. It must be transposed into the laws of the EU Member States by 18 March 2016 and will be applied from that date. 

Many of the detailed measures under UCITS V will be implemented through delegated acts to be adopted by the European Commission, referred to as level II measures. For this purpose, the European Securities and Markets Authority (ESMA) provided technical advice to the European Commission on 28 November 2014 as to the content of two of the delegated acts required in respect of the depositary regime under UCITS V. And, on 23 July 2015, ESMA launched a consultation on guidelines on sound remuneration policies; this consultation will close on 23 October 2015. 

New Depositary Regime for UCITS … and Certain AIFs 

Before the Bill was introduced by the government, the CSSF had previously released a circular2 setting forth rules applicable to depositaries of UCITS and had invited Luxembourg depositaries to start an internal assessment to prepare for compliance with the new depositary requirements. For further information as to this circular, please refer to CSSF Sets Forth Rules for UCITS Depositaries and Clarifies Luxembourg Depositary Regimes. 

The Bill transposes into Luxembourg law the following new requirements for depositaries under UCITS V: 

  • Eligibility conditions: The Bill will maintain the requirement that the depositary function be limited to Luxembourg credit institutions and to Luxembourg branches of credit institutions located in EU Member States other than Luxembourg. 
  • Cash monitoring: The Bill clarifies that the depositary must monitor cash flows and must ensure proper collection and booking of subscription funds and income. 
  • Conditions on delegation of safe-keeping: Delegation of safe-keeping must be justified by objective reasons and be subject to initial and periodic due-diligence of the sub-custodian; the latter must have an adequate infrastructure, and be subject to prudential regulation, with respect to the safe-keeping of financial instruments. 
  • Segregation of assets throughout the custody chain: The depositary and its sub-custodian must differentiate and segregate assets of UCITS from their proprietary assets as well as those assets that are not collectively managed. 
  • Liability regime: The depositary has a strict obligation to make restitution with respect to financial instruments under its safe-keeping – the depositary is liable for any loss of assets unless it can prove that the loss arose as a result of an external event beyond the depositary’s reasonable control. Unlike the provisions of the EU AIFM Directive (AIFMD), the depositary is not permitted to contractually discharge its liability. 

The Bill goes beyond the mere transposition of UCITS V into Luxembourg law, as the new provisions for depositaries will also be applicable to undertakings for collective investments under part II of the UCI Law (Part II UCIs) – these are alternative investment funds (AIFs) that can be marketed in Luxembourg to retail investors. The Bill aims to introduce a single depositary regime for UCITS and Part II UCIs, irrespective of whether or not the Part II UCI is managed under the lighter regime of the AIFM Law. According to the explanatory notes of the Bill, this approach is justified to ensure a higher level of protection for undertakings that may raise capital from retail investors. The explanatory notes further refer to the regulation on European long-term funds (ELTIFs), which imposes a depositary regime largely replicating that under UCITS V. Comparable to Part II UCIs, ELTIFs are AIFs that may be marketed to retail investors. 

When transposing the AIFMD into Luxembourg law, Luxembourg introduced a new type of license offered by the AIFMD for Depositaries of Non-Financial Assets – these are depositaries safe-keeping the assets of AIFs that: (i) have no redemption rights exercisable for a period of five years; and (ii) generally do not invest in (a) financial instruments to be held in custody or (b) issuers or non-listed companies in order to potentially acquire control over such companies. Depositaries of Non-Financial Assets are generally not credit institutions and – as a consequence of the application of the future UCITS depositary regime to Part II UCIs – will not be permitted to serve as depositaries of Part II UCIs.

Remuneration Policy 

The Bill introduces new rules on the remuneration of persons involved in the management of a Luxembourg UCITS. This is in accordance with the commitments of G20 to mitigate risks in the financial services sector, and broadly replicates the requirements on remuneration policy applicable to AIF managers (AIFMs) under the AIFM Law. 

With respect to an appropriate balance between fixed and variable components of total remuneration in the management of UCITS, the Bill introduces an obligation to pay at least 50% of variable remuneration in the form of units of the relevant UCITS and to defer at least 40 % of the variable remuneration component over a period of at least three years. The remuneration policy will be subject to central and independent internal review, on at least an annual basis. 

Administrative Sanctions 

The Bill introduces into the UCI Law specific rights of the CSSF to impose administrative sanctions and penalties provided under UCITS V. 

Sanctions and penalties may be imposed with respect to UCITS and Part II UCIs, as well as their management companies, depositaries and any other entities providing services to the UCITS or the Part II UCIs and which are under the supervision of the CSSF. This mechanism is different from the sanctions under the AIFM Law, which enable the CSSF to act against the AIFM only. Luxembourg management companies licensed to manage both UCITS and AIFs (commonly referred to as “SuperManCos”) will be required to assess on a case-by-case basis whether their behavior in relation to the management of UCITS or AIFs can be sanctioned under either or both regimes. 

Proposed Changes to the AIFM Law 

The Bill proposes the following changes to the AIFM Law: 

  • AIFMs (other than sub-threshold AIFMs) must have their accounts audited by an external auditor. Since Luxembourg AIFMs generally have an external auditor, this new requirement will likely have minimal impact. 
  • AIFMs can use their AIFMD passport for the “MiFID-like” services under article 5(4) of the AIFM Law (e.g., discretionary portfolio management, investment advice, safe-keeping and administration in relation to units of UCIs, receipt and transmission of orders as to financial instruments). This amendment transposes article 92 of MiFID II.4


1) Directive 2014/91/EU of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions for UCITS as regards depositary functions, remuneration policies and sanctions.
2) Circular 14/587 on UCITS depositaries, 11 July 2014.
3) In our view, the Bill should also amend article 26-1 of the law of 5 April 1993 on the financial sector, as amended, in this respect. Part II UCIs are AIFs by definition, and Depositaries of Non-Financial Assets are generally permitted to act as depositaries of AIFs (subject to the above-mentioned criteria).
4) Directive 2014/65/EU of 15 May 2014 on markets in financial instruments. The transposition deadline was 3 July 2015. 

Updated AIFMD FAQ 

By Patrick Goebel and Christopher Dortschy 

On 10 August 2015, the Luxembourg financial regulator, the CSSF, published the ninth version of its AIFMD Frequently Asked Questions (FAQ). Among other (minor) changes, new section 21 clarifies the definitions of “marketing” and “reverse solicitation” from a Luxembourg perspective. In a preliminary remark, the CSSF reiterates that there is currently no common EU-wide guidance as to marketing and reverse solicitation, and therefore positions may vary across the EU. 

In the FAQ, the CSSF clarifies that the presentation by an AIFM of draft documents regarding an AIF to prospective investors should not constitute a marketing activity – this would include “inbound passporting” situations under article 29, 31, 37 or 45 of the AIFM Law. Also – with respect to a topic on which market practitioners have expressed differing views – the CSSF clarifies that “marketing” should not include secondary trading of units of an AIF, except when involving an indirect offering or placement through one or more intermediaries acting at the initiative or on behalf of the AIFM or the AIF. The FAQ further explains how marketing may be performed, clarifies that a physical presence for carrying out marketing activity in Luxembourg is not required for that purpose, and introduces and defines the term “distance marketing.” 

In the FAQ, the CSSF indicates that reverse solicitation would involve providing information regarding an AIF to, and making units of the AIF available for purchase by, a potential investor upon the initiative of such investor or its agent – and in the absence of any solicitation by the AIFM, the AIF or any relevant intermediary. In the view of the CSSF, therefore, marketing would not be involved if the AIFM is able to prove that (a) the investor or its agent approached the AIFM or the AIF upon its own initiative with the intention of receiving information as to the AIF for a potential investment, and (b) neither the AIFM nor the AIF (or any of their intermediaries) had solicited the investor to invest in the relevant AIF. 

Luxembourg Completes FATCA Implementation by Enacting Luxembourg–U.S. Intergovernmental Agreement 

By Patrick Goebel and Christine Renner 

The Luxembourg “FATCA Law”1 became effective on 1 August 2015. Among other provisions, the FATCA Law implemented the Model 1 Luxembourg–U.S. intergovernmental agreement of 28 March 2014 (IGA). On the day prior to the law taking effect, the Administration des Contributions Directes (Office of Income Tax) issued two circulars on FATCA – the first providing guidance on the technical aspects of the information exchange between Luxembourg and the United States2 and the second clarifying the context of the FATCA Law.3 This article analyzes the impact of FATCA on covered institutions, pursuant to the provisions of the law itself and the relevant guidance. 

Who is Concerned? 

Foreign financial institutions (FFIs) that are obliged to report certain accounts to the Office of Income Tax are covered by the FATCA Law. Funds and their affiliated entities generally fall under the definition of an “investment entity” qualifying as an FFI.

Managers may be surprised to discover that the definition of FFI in Luxembourg differs from other countries. As is the case for all Model 1 IGAs, the definition of FFI provided under the FATCA Law is country-specific. While U.S. Treasury rules may be applied in some circumstances to interpret parts of the FATCA Law and the IGA, such rules may not be used to determine whether an entity qualifies as an FFI in Luxembourg. Further guidance has been issued by the Office of Income Tax5 and self-regulating bodies – such as ALFI (the Association of the Luxembourg Fund Industry) and ABBL (the Luxembourg Bankers Association) – and the latter have indicated their guidance will be updated in the coming months. 

FFIs are considered to be reporting FFIs under the FATCA Law (Reporting FFIs), unless they fall under an exemption or are deemed compliant (i.e., subject to lesser or no reporting requirements). FFIs falling under the “investment vehicle” category may meet the terms of several exemptions and deemed-compliant options – including, among others, the “sponsored entity” exception. This exception permits a Reporting FFI that qualifies under the FATCA Law as a sponsoring entity to register as such with the U.S. Internal Revenue Service, and additionally to register one or more sponsored entities with the Luxembourg Office of Income Tax. In such a case, only the sponsor must perform FATCA’s periodic reporting requirements; the sponsored entities would then not be required to report. 

Reporting Obligations 

The FATCA Law imposes on Reporting FFIs the obligation to perform appropriate due diligence on persons or entities holding accounts with the Reporting FFIs and to report any U.S.-reportable accounts to the Office of Income Tax. 

The due diligence requirements are detailed in Annex I of the IGA and impose review and reporting obligations. To avoid having an account being treated as a U.S.-reportable account, the account holder may complete a self-certification, and the Reporting FFI does not need to obtain further verification unless the Reporting FFI knows or has reason to know that such self-certification is incorrect or unreliable. 

Reporting FFIs are required to send reports to the Office of Income Tax. These reports include, among other information, the basic details of the account, the balance and payments made. 

The FATCA Law does not impose specific eligibility conditions on service providers that support FFIs in fulfilling their reporting obligations. 


The FATCA Law provides the Office of Income Tax with two options to enforce compliance with the reporting obligations: 

  • An administrative fine of up to EUR 250,000 may be imposed, if a Reporting FFI does not (i) perform a reasonable due diligence or (ii) does not have a system in place to communicate the necessary information. 
  • An administrative fine may be imposed of at least EUR 1,500 and up to 0.5% of the amounts to be reported, if the report is not timely filed or is incomplete. 

Reporting Deadline 

The deadline for the reporting is 30 June of each year. The first-year deadline for 2014 data was 31 August 2015. 

The data for 2014 to be reported in 2015 includes basic data, such as the registered address, Luxembourg tax number, GIIN and the contact detail of the responsible officer for FATCA. Beginning with 2015 data, if the Reporting FFI does not identity any reportable U.S. accounts or other reportable data, the Reporting FFI must file a nil return (i.e., a return indicating that there are no reportable accounts). All other Reporting FFIs will be subject to full-scope reporting if the Reporting FFI has any U.S. accounts that are reportable. 


1) Law of 24 July 2015 on FATCA.
2) Circular of the Director of Tax ECHA n° 2.
3) Circular of the Director of Tax ECHA n° 3.
4) Investment entities, qualifying as FFIs, are defined as entities that conduct as a business (or are managed by an entity that conducts as a business) one or more of the following activities or operations for or on behalf of a customer: (i) trading in money market instruments (e.g., cheques, bills, certificates of deposit, derivatives), foreign exchange, exchange, interest rate and index instruments, transferable securities or commodity futures trading; (ii) individual and collective portfolio management; or (iii) otherwise investing, administering, or managing funds or money on behalf of other persons.
5) See footnotes 2 and 3, supra.

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